Hotel taxes put online booking companies under the microscope

by Chuck September 26, 2012

Hotel taxes

Hotel taxes

Dozens of states are actively targeting online travel companies claiming they are owed millions of dollars in hotel taxes.

Hotel tax litigation pits states against online travel sites

The negotiator mascot is unlikely to broker many compromises  as dozens of states bring lawsuits seeking to apply hotel and lodging taxes to profits made by online travel sites.

A recent summary ruling in Washington, D.C. found that online travel companies (OTCs) including Expedia, Travelocity and Priceline are accountable for the 14.5% tax due on the full retail price of hotel rooms rented in the district rather than the greatly reduced wholesale rate they had been collecting.

As a result of this ruling, D.C. expects to collect an additional $6 million to $10 million annually and that as much as $200 million is owed in taxes and penalties dating back to 1998.

The city cannot begin collecting the tax yet since portions of the lawsuit are yet to be decided. In fact, the case may not be decided for years to come since the OTCs, represented by the Interactive Travel Services Association, have not announced whether they intend to file individual appeals.

Unsurprising, the Interactive Travel Services Association disagrees with the court’s decision.

“It is also an outlier as most other courts nationwide that have reached judgment have ruled in favor of the online travel companies,” Joe Rubin, association director, said in a statement.

In fact, just last month the U.S. Sixth Circuit Court of Appeals ruled against an appeal brought by Ohio municipalities basically finding that OTCs are not subject to the application of lodgings taxes for their services because they do not “operate, furnish, lease or maintain hotel rooms”.

The trade group claims that their industry has prevailed in 22 of 29 similar lawsuits.

Rubin said in a press release, “We hope other municipalities will recognize this recurring trend.  As demonstrated by these decisions, there is little basis for states and localities to continue to pursue dead-end litigation that wastes taxpayer resources.”

States, on the other hand, might not see such litigation as “wasting taxpayer resources” as they continue to struggle to make up for record budget shortfalls. While general sales tax collections continue to be less than hoped for in many regions of the country and hundreds of thousands of vacant homes depress property values and the related tax collections, it seems unlikely that states will turn a blind eye to what they see as lost lodgings taxes.

And other industries should be prepared to be put under the microscope as well. As congress continues to squabble over the vagaries of reinstating various kinds of taxes, the states are under increased burden to find their own creative solutions.

Charles F. Spielmann

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